William M. Brown, Grandfathering Can Seriously Damage Your Wealth: Due Diligence in Mergers and Acquisitions of Medical Device Companies, 36 Gonz. L. Rev. 315 (2001).[PDF] [Westlaw] [LexisNexis]
Consider this hypothetical scenario: In the early 1980s, Major Pharmaceutical & Medical Devices Company acquires Small Silicone Breast Implant Company, to function as a subsidiary. For several years, the acquired subsidiary manufactures and sells silicone gel breast implants at a substantial profit. Then in 1988, the Food and Drug Administration (“FDA”) informs the breast implant industry it will seek safety data from all manufacturers. The FDA relies on powers given to it 12 years earlier in the 1976 Medical Device Amendments. Silicone breast implants remain on the market while this data is gathered. Some data are eventually submitted by Major Pharmaceutical & Medical Devices Company and other companies in the industry. The FDA reviews the data and deems them inadequate. The FDA commissioner’s announcement of the inadequacy of the data coupled with the decision on January 6, 1992, to call for a voluntary moratorium on the sale of breast implants provokes an outcry that breast implants are dangerous. Tens of thousands of women with breast implants contact their lawyers and gather in an attempt to form a class. Some are featured on “The Connie Chung Show,” causing near hysteria in some women, and starting an avalanche of products liability litigation against implant companies. By now, Major Pharmaceutical & Medical Devices Company’s liability (potentially billions of dollars) far outweighs any profits Small Silicone Breast Implant Company could ever possibly have made.
Did the management of Major Pharmaceutical & Medical Devices Company improvidently acquire Small Silicone Breast Implant Company, thereby exposing Major Pharmaceutical & Medical Devices Company to these liabilities and legal bills? Or did management exercise sufficient “due diligence”?… Read more